Fed rate cuts
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FOMC Minutes Preview: Stocks Wobble as Markets Rethink Fed Rate Cuts

By:Ilya Spivak

Stocks and bonds are in retreat while the U.S. dollar gains as markets rethink the 2024 Fed rate cut outlook. December’s FOMC meeting minutes and middling economic data may bring more of the same.

  • Stocks and bonds are down as Treasury yields and the U.S. dollar rise to start 2024.
  • Traders are seemingly rethinking the scope for Fed interest rate cuts in the coming year.
  • Minutes from December’s FOMC meeting, ISM and JOLTs data are now in the spotlight.

Stocks and bonds swooned together as financial markets came back to life after the New Year holiday. The U.S. dollar powered higher as Treasury yields rose and gold prices struggled to make hay out of seemingly escalating tensions in the Red Sea after an Iranian warship entered the region.

A unifying theme screams out to be noticed. The markets ended 2023 with an emphatic burst of optimism as hopes for a brisk round of Federal Reserve interest rate cuts stoked risk appetite. Their first steps of 2024 mark a retreat for the trends that this narrative defined across major assets.

2024 Fed interest rate cuts: everybody knows

As it stands, the markets have already priced in a blistering run of six 25-basis-point (bps) Fed rate cuts for this year. For their part, central bank officials penciled in three cuts when they updated official forecasts last month. Investors may be turning cautious as a busy economic calendar tests which of these scenarios seems likelier.

The release of minutes from December’s meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC) are in focus. That conclave marked policymakers’ embrace of speculation that the inflation fight is over, and easing is now on the way.

Traders cheered this outcome as it unfolded three weeks ago. Their mood may have become more circumspect as they wonder if there is still anything left to be priced in – and if so, why.

U.S. market-implied policy rates
Source: Bloomberg

In fact, the lion’s share of the dovish shift in Fed policy expectations happened after November’s meeting. The guidance there was more subtle but the contrast with September’s hawkish posture more overt. The FOMC then seemed to offer clearer confirmation in December, but the markets’ vision of the path ahead was already sketched out by then.

It is unlikely that the minutes document will amplify dovish fervor. Instead, the markets may be left to wonder if the economy is truly so weak that it needs six rate cuts, or if they’ve over-speculated. A measured tone from Fed officials that clashes with the zeal for stimulus now baked into rates pricing may force a rethink.

U.S. economic growth: still slow and steady?

Ahead of the minutes, the Institute of Supply Management (ISM) is expected to say that the U.S. manufacturing sector shrank for a fourteenth consecutive month in December, albeit at a slower rate. Meanwhile, the Job Openings and Labor Turnover Survey (JOLTS) is seen showing that vacancies rose a bit to 8.9 million in November.

Analytics from Citigroup suggest that U.S. economic data outcomes have increasingly converged on consensus forecasts since mid-August as market-watchers upgraded growth expectations for 2024. That seems to foreshadow a set of middling outcomes.

Data reiterating the now familiar “slow and steady” view of the U.S. economy appears may conspire alongside the minutes to erode confidence in the big-splash campaign dreamed up by investors. In that, it might help set the stage stocks and bonds to backtrack further while the U.S. dollar continues to recover.

Citi U.S. economic surprise index
Source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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